US Army fudged its accounts by trillions of dollars, auditor finds

NEW YORK, Aug 19 (Reuters) - The United States Army's finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department's Inspector General, in a June report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army's financial statements for 2015 were "materially misstated," the report concluded. The "forced" adjustments rendered the statements useless because "DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions."

Disclosure of the Army's manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades.

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department - far and away the biggest chunk of Congress' annual budget - spends the public's money.

The new report focused on the Army's General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn't keep required data, and much of the data it had was inaccurate, the IG said.

"Where is the money going? Nobody knows," said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning.

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The significance of the accounting problem goes beyond mere concern for balancing books, Spinney said. Both presidential candidates have called for increasing defense spending amid current global tension.

An accurate accounting could reveal deeper problems in how the Defense Department spends its money. Its 2016 budget is $573 billion, more than half of the annual budget appropriated by Congress.

The Army account's errors will likely carry consequences for the entire Defense Department.

Congress set a September 30, 2017 deadline for the department to be prepared to undergo an audit. The Army accounting problems raise doubts about whether it can meet the deadline - a black mark for Defense, as every other federal agency undergoes an audit annually.

For years, the Inspector General - the Defense Department's official auditor - has inserted a disclaimer on all military annual reports. The accounting is so unreliable that "the basic financial statements may have undetected misstatements that are both material and pervasive."

In an e-mailed statement, a spokesman said the Army "remains committed to asserting audit readiness" by the deadline and is taking steps to root out the problems.

The spokesman downplayed the significance of the improper changes, which he said net out to $62.4 billion. "Though there is a high number of adjustments, we believe the financial statement information is more accurate than implied in this report," he said.

"THE GRAND PLUG"

Jack Armstrong, a former Defense Inspector General official in charge of auditing the Army General Fund, said the same type of unjustified changes to Army financial statements already were being made when he retired in 2010.

The Army issues two types of reports - a budget report and a financial one. The budget one was completed first. Armstrong said he believes fudged numbers were inserted into the financial report to make the numbers match.

"They don't know what the heck the balances should be," Armstrong said.

Some employees of the Defense Finance and Accounting Services (DFAS), which handles a wide range of Defense Department accounting services, referred sardonically to preparation of the Army's year-end statements as "the grand plug," Armstrong said. "Plug" is accounting jargon for inserting made-up numbers.

At first glance adjustments totaling trillions may seem impossible. The amounts dwarf the Defense Department's entire budget. Making changes to one account also require making changes to multiple levels of sub-accounts, however. That created a domino effect where, essentially, falsifications kept falling down the line. In many instances this daisy-chain was repeated multiple times for the same accounting item.

The IG report also blamed DFAS, saying it too made unjustified changes to numbers. For example, two DFAS computer systems showed different values of supplies for missiles and ammunition, the report noted - but rather than solving the disparity, DFAS personnel inserted a false "correction" to make the numbers match.

DFAS also could not make accurate year-end Army financial statements because more than 16,000 financial data files had vanished from its computer system. Faulty computer programming and employees' inability to detect the flaw were at fault, the IG said.

DFAS is studying the report "and has no comment at this time," a spokesman said.

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A Russian servicemen uses binoculars during a competition of the International Army Games 2016 at a range in the settlement of Alabino outside Moscow, Russia, August 2, 2016. REUTERS/Maxim Shemetov

Russian crew members transport T-80 tanks on a pontoon bridge during the Open Water competition for pontoon bridge units, part of the International Army Games 2016, in the city of Murom, Russia, August 6, 2016. REUTERS/Maxim Zmeyev

Tu-22M3 bombers perform during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

An Iranian serviceman takes part in the Paratrooper's platoon competition for airborne squads, part of the International Army Games 2016, at the Rayevsky shooting range outside the Black Sea port of Novorossiysk, Russia, August 8, 2016. REUTERS/Maxim Shemetov

Sukhoi Su-30SM jet fighters of the Sokoly Rossii (Falcons of Russia) aerobatic team fly in formation during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

A Chinese serviceman takes part in the Paratrooper's platoon competition for airborne squads, part of the International Army Games 2016, at the Rayevsky shooting range outside the Black Sea port of Novorossiysk, Russia, August 8, 2016. REUTERS/Maxim Shemetov

Servicemen in festive costumes get ready to perform at the opening ceremony of the International Army Games 2016 at Gvardeisky Range, Kazakhstan, August 2, 2016. REUTERS/Shamil Zhumatov

Chinese servicemen sit atop an armoured infantry fighting vehicle during the Paratrooper's platoon competition for airborne squads, part of the International Army Games 2016, at the Rayevsky shooting range outside the Black Sea port of Novorossiysk, Russia, August 8, 2016. REUTERS/Maxim Shemeto

A ZBD-03 armoured infantry fighting vehicle, operated by a crew from China, drives during the Paratrooper's platoon competition for airborne squads, part of the International Army Games 2016, at the Rayevsky shooting range outside the Black Sea port of Novorossiysk, Russia, August 8, 2016. REUTERS/Maxim Shemetov

A Kazakhstan's Army military policeman stands guard as riders in historical costumes perform at the opening ceremony of the International Army Games 2016 at Gvardeisky Range, Kazakhstan, August 2, 2016. REUTERS/Shamil Zhumatov

The S-300 air defence system launches a missile during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

KRASNODAR TERRITORY, RUSSIA - AUGUST 8, 2016: A soldier in the second leg of the Airborne Platoon (Desantny Vzvod) contest, part of the 2016 International Army Games organised by the Russian Defence Ministry at the Rayevsky training ground near the city of Novorossiysk. Sergei Bobylev/TASS (Photo by Sergei Bobylev\TASS via Getty Images)

Kornet-D1 mobile antitank missile complex performs during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

Russian servicemen walk past a fence during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

People walk past the air defence missile systems during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

A Sukhoi Su-27 jet fighter of the Russkiye Vityazi (Russian Knights) performs during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

Chinese crew members transport a T-80 tank on a pontoon bridge during the Open Water competition for pontoon bridge units, part of the International Army Games 2016, in the city of Murom, Russia, August 6, 2016. REUTERS/Maxim Zmeyev

A boy stands on the S-300 air defence mobile missile system during the International Army Games 2016 at the Ashuluk military polygon outside Astrakhan, Russia, August 7, 2016. REUTERS/Maxim Shemetov

Mil Mi-28N Night Hunter military helicopters of the Berkuty (Golden Eagles) aerobatic team perform during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

Mikoyan MiG-29 jet fighters of the Strizhi (Swifts) aerobatic team fly in formation during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

Mikoyan MiG-29 jet fighters of the Strizhi (Swifts) aerobatic team fly in formation during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

Sukhoi Su-27 jet fighters of the Russkiye Vityazi (Russian Knights) aerobatic team fly in formation during the International Army Games 2016, in Dubrovichi outside Ryazan, Russia, August 5, 2016. REUTERS/Maxim Shemetov

A BMP-2 amphibious infantry fighting vehicle, operated by a crew from Kazakhstan, drives during a competition of the International Army Games 2016, at a range in the settlement of Alabino outside Moscow, Russia, August 2, 2016. REUTERS/Maxim Shemetov

A T-72 tank, operated by a crew from Azerbaijan, fires at a target during the Tank Biathlon competition, part of the International Army Games 2016, at a range in the settlement of Alabino outside Moscow, Russia, August 2, 2016. REUTERS/Maxim Shemetov

T-72 tanks, operated by crews from Kuwait (front) and Nicaragua, drive during the Tank Biathlon competition, part of the International Army Games 2016, at a range in the settlement of Alabino outside Moscow, Russia, August 2, 2016. REUTERS/Maxim Shemetov

A tank's barrel is seen on the course of the Tank Biathlon competition during the International Army Games 2016 in Alabino, outside Moscow, Russia, July 30, 2016. REUTERS/Maxim Zmeyev

KRASNODAR TERRITORY, RUSSIA - AUGUST 8, 2016: A Russian soldier in an armoured vehicle in the second leg of the Airborne Platoon (Desantny Vzvod) contest, part of the 2016 International Army Games organised by the Russian Defence Ministry at the Rayevsky training ground near the city of Novorossiysk. Sergei Bobylev/TASS (Photo by Sergei Bobylev\TASS via Getty Images)